Bitcoin Forum

(repost from general discussion)

Hello,

the past few months I've heard about many people who consider the limited money supply of Bitcoin as a flaw. I am no economist, and won't get involved in a discussion for or against deflation, but there is one claim I am sympathetic with: if people were paid in bitcoins, their pay rate might need to decrease gradually, and people definitely don't like to see decreasing numbers (purely a psychological thing). Hence my solution: IndexCoin.

IndexCoin is a currency backed by bitcoin, but with an exchange rate that varies in time. Actually, IndexCoin is nothing more than a different representation of bitcoin amounts. The exchange rate is determined by an index, which is defined by a central authority. Note however that many such authorities may exist, and people are free to choose one.

The authority publishes (using the necessary cryptographic arrangements, such as digitally signing) regularly an updated file which contains indexing points, Each point is defined as a block number together with an index value, plus a special index for any point in time before the first indexing (typically 1).

The IndexCoin client displays the amount for each transaction calculated for the time/block position in which the transaction took place, plus pseudo-transactions that represent the indexation, eg. "0.1% Interest on balance 1234.45 IDXC: +1.23445", if the index increased with 0.1% at a point in time where the wallet's balance was 1234.45 IDXC.

When doing a transaction, people can freely choose which index they want to use for the currency they send (or the address format could be modified to include information about the holder's native index). The client will then lookup the index value of that, and send the corresponding number of BTC, implicitly doing a feeless "currency convertion". If I use the Alpha-index, and you're using the Beta-index, I could choose to send you an amount in AlphaCoins or in BetaCoins.

Though I am not sure an index linked to such a volatile exchange rate would be a good idea, but exchange sites could be their own index authority, allowing eg. an indexcoin client that denominates values in "MTGUSD".

A payment contract could stipulate a trusted index authority to use for payments then.

Is such a complex system really necessary?

If it is purely a psychological thing, then all we need is an android/iphone client for Joe Average that displays his balance like this by default:

70 USD
(10 BTC)

Client becomes popular, mass psychological issues resolved.  Works because most people can be rather superficial unfortunately.


Anyhow, once Bitcoin has matured its value will eventually stabilise or deflate at a few % per year, to reflect general economic growth.  Such a small amount of deflation will not anger Joe Average, I don't think.

It is a purely psychological thing, but you need people to think in the derived (indexed) unit rather than the internal (bitcoin) unit, as their pay in the latter one will decrease.

PS: this is not a serious proposal, just to show that it's possible to address (some of) the concerns.

I think there is some support in Open Transactions that will already do something very similar to this, i.e. same concept, different name ... look at Basket Currencies.

IndexCoin sounds a bit like the history of the Brazilian Real (https://secure.wikimedia.org/wikipedia/en/wiki/Brazilian_real).

So you are designing a system that multiplies everything by a constant that is occasionally modified over time? I think it's over engineering: Bitcoin acceptance won't be eased much by prettier numbers...

Decreasing salaries somehow imply, that you sell your BTC to USD and buy goods with the latter.
After BTC took over the world, your salary will stay about the same, but the amount of good, you are able to buy will increase by the rate of the global economy growth.

If the economy is growing, but the number of bitcoins remains constant (or decreasing slightly due to loss, etc), then prices will fall. Wages must fall too, but all else being equal, you will be able to buy the same number of things with your fewer coins. What Sipa and others propose is merely a way for prices and wages to stay constant, without resorting to actually inflating the money supply.

It is a longstanding myth that a constant/fixed money supply is "bad" for an economic system. The amount of money in a system is irrelevant, so long as it doesn't change unexpectedly (and so long as there are enough units to facilitate trade). Prices are set according to supply/demand of money vs. the good, and a set amount of money simply means the price adjustment occurs in the price of the good.

Those who think money needs to be "added" to a system over time to permit economic growth are confusing nominal growth with real growth. Probably every politician in America save Ron Paul doesn't get this.